SPH REIT - CIMB Research 2017-10-10: Steady Performance

SPH REIT SK6U.SI

SPH REIT - Steady Performance

SPH REIT's 4QFY8/17 and FY8/17 DPUs in line with our and Bloomberg consensus expectations.
Better cost management and positive portfolio rental reversion lifted bottomline.
Phase 2 asset enhancement initiative (AEI) at Paragon could provide a small boost when completed in 2018F.

SPHREIT reported a 1.3% yoy rise in 4QFY17 revenue to S$52.9m while distribution income grew 1.1% yoy to S$36.3m. 4QFY17 DPU was 1.42 Scts, up 0.7% yoy.
For FY17, the trust achieved a DPU of 5.53 Scts, up 0.5% yoy, accounting for 97.9% of our forecast. It also enjoyed a S$34.9m portfolio revaluation gain, thanks to organic improvement and cap rate compression.

The better performance in FY17 was the result of higher contributions from both Paragon and Clementi Mall, and lower property expenses.
Although there was a slight negative rental reversion of 0.8% at Paragon, the positive rent improvements at Clementi Mall helped offset this decline. As a result, average portfolio rent grew 1.2% yoy. In addition, there was cost savings due to proactive utility cost management which lifted NPI margin to c.79%.

Operating environment for both properties continue to be robust with stable shopper traffic and a slight uptick in tenant sales at Paragon while Clementi Mall saw a marginal 0.3% decline in shopper traffic and 5.8% dip in tenant sales.
The second phase of AEI at Paragon has commenced and when completed in mid-2018, it should add a further 5,000 sq ft of leasable area.

SPHREIT’s balance sheet is healthy with gearing at a low 25.4% as at end-FY17 and 85.9% of its debt cost on a fixed rate basis. Average cost of debt was at 2.82%. We believe this should enable SPHREIT to tap inorganic opportunities for growth.

We tweak our FY18-19 DPU estimates by 0.5% post results and introduce our FY10 forecasts. We maintain our DDM assumptions, with cost of equity unchanged at 7.3% (risk free rate: 2.5% and terminal growth of 2%). However, our DDM-based target price rises slightly to S$1.06 as we roll forward our assumptions.
Maintain our Hold rating.
Key potential re-rating catalysts include new acquisitions to boost growth upside.
Downside risks include a lacklustre retail environment which could hamper rental growth.

LOCK Mun Yee CIMB Research | YEO Zhi Bin CIMB Research | http://research.itradecimb.com/ 2017-10-10

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 1.06 Up 1.040